Venture capital funds plunge 82% in Q3

Coming consolidation calls for a public ranking of VCs based on exits and recent deal quality.

The latest Q3 numbers confirm what is now a pretty well accepted fact: the VC industry is shrinking drastically.

Only 17 firms raised money in Q3 2009 -- the fewest since 1994, according to Thompson-Reuters and the NVCA.

This is down 82% from the same period a year ago, when nearly $8.5 billion was raised by 63 companies.

Much of the money poured into VC firms comes from LPs like pension funds, ie, it’s probably your money, so you should manage it. And even if you don't put money towards a pension, we all know now that the globe is painfully economically interdependent. What happens in the VC industry matters everywhere.

And the industry is shrinking to about half its size. There will be consolidation. Many funds will go away. Many partners will be invited to leave. But many will also stay on where they are, and we all have an interest in seeing the right people stick around.

Decisions about which heads will roll may or may not be based on value actually generated by VCs. There’s the Old Boys' Network effect, not to mention laziness, hype, emotions, favors—any number of irrational factors could put the wrong people at the top in the post-consolidation VC world, while real value-generators get pushed aside.

So here's my thinking. Given the wealth of industry expertise in Vator.tv’s entrepreneurial community, why not collectively create a set of criteria to evaluate VCs, and turn that into a published and regularly updated ranking?

How would you evaluate the overall performance of a venture capitalist?  What criteria would you use to determine a VCs overall value-add to taxpayers and society at large? Step one is identifying the relevant factors that should have weight and can be quantified using public information. Below is a first draft of some evaluation criteria that could provide a framework for a clear-cut scoring system. I'm hoping Vator readers will help refine it.

 

Criteria:

1) Exit performance in the last 7 years (roughly the lifespan of a venture fund). More credit should be given for coming in early, and for leading versus participating in a round.

• M&A number and dollar amount. It’s easy to find the number of acquired companies a VC invested in, but would you also account for total acquisition amount, given that roughly half are undisclosed? Would you average the known amounts, and give more credit for those that beat the average?

• IPO amount and dollar value. Some weight should also be given to the company’s subsequent performance relative to the NASDAQ.

 

2) Quality of recent investments. Exits take a long time, and might tell you who was really smart seven years ago. To rate recent activity, one could look at private companies with known valuations. The number of such investments and dollar amounts of valuations would be considered, as well as when the VC came in and whether he or she led the round.

3) Value-add to entrepreneur. Hypothetically, a VC might be able to post exit and valuation returns because they can bamboozle a good entrepreneur. There ought to be some way to quantify the contribution a good VC makes from the perspective of the entrepreneur... maybe estimated returns to founders upon on exits, or stats from The Funded could be included.

A rough public scoring system of VC performance would help to rationalize the market and make sure the Great VC Slim-Down results in a lean and efficient VC ecosystem.

Let me know what you think.